Public Bill Committee

[Mr Jim Hood in the Chair]

Jimmy Hood: Before we begin, I have a few preliminary announcements. It is not very warm in here today, but if hon. Members feel inclined to remove their jackets, they are welcome to do so. Could all hon. Members ensure that their mobile phones, pagers, et cetera, are turned off or switched to silent mode during the Committee’s sittings? As a general rule, my fellow Chair and I do not intend to select starred amendments that have not been tabled with adequate notice.
Not everyone is familiar with the process for taking oral evidence in Public Bill Committees, so it may help if I briefly explain how we will proceed. The Committee will first be asked to consider the programme motion on the amendment paper, and debate on that motion is limited to half an hour. We will then proceed to a motion to report written evidence, and then to a motion to permit the Committee to deliberate in private in advance of the oral evidence sessions, which I hope we can take formally. Assuming that the third of those motions is agreed to, the Committee will then move into private session. Once the Committee has deliberated, the witnesses and members of the public will be invited back into the room and our oral evidence session will begin. If the Committee agrees to the programme motion, the Committee will hear oral evidence this morning and this afternoon, as well as on Thursday morning and Thursday afternoon.

Edward Davey: I beg to move,
That—
TABLE

Date

Time

Witness
Tuesday 9 November
Until no later than noon
Royal Mail
Tuesday 9 November
Until no later than 1.00 pm
Communication Workers Union
Unite
National Federation of SubPostmasters
Tuesday 9 November
Until no later than 5.00 pm
Office of Communications (Ofcom)
Postal Services Commission (Postcomm)
Tuesday 9 November
Until no later than 6.00 pm
Mail Users’ Association
Mail Competition Forum
Tuesday 9 November
Until no later than 7.00 pm
Mutuo
Employee Ownership Association
ifs ProShare
Thursday 11 November
Until no later than 9.55 am
Consumer Focus
Association of British Credit Unions Limited
Thursday 11 November
Until no later than 10.25 am
Royal Mail Pension Plan Trustees
Thursday 11 November
Until no later than 2.00 pm
Richard Hooper CBE, Chair of the independent review of the UK postal services sector
Thursday 11 November
Until no later than 3.00 pm
Department for Business, Innovation and Skills
We have had good discussions with the Opposition on the programme motion. We asked them how many days they wanted the Committee to sit for to ensure that the Bill was properly scrutinised, and we have tried to accommodate them. I therefore hope that the Committee will accept this programme motion.

Gordon Banks: The Minister is correct that we have had good, informative discussions, and we are perfectly happy with the programme motion.

Question put and agreed to.

Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Mr Davey.)
Written evidence to be reported to the House
PS 07 National Federation of SubPostmasters

Resolved,
That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Mr Davey.)

The Committee deliberated in private.

On resuming—

Witnesses: Donald Brydon CBE, Chairman, Royal Mail Group, Moya Greene, Chief Executive, Royal Mail Group, and Paula Vennells, Managing Director, Post Office Limited, gave evidence.

Jimmy Hood: Welcome back. May I give a special welcome to our witnesses this morning? I will invite the witnesses to introduce themselves, after which we will proceed directly to the questions. I am not inviting preliminary statements from witnesses, just a brief introduction. I am sure that the witnesses will get their points of view over during the questions. The first question is from Nia Griffith.

Q 1

Nia Griffith: Thank you, Mr Hood. Ms Greene, how will the Bill help Royal Mail? Do you think that it, as drafted, will provide a solution to the issues facing Royal Mail? Are there any ways in which it could be significantly improved? This sitting is partly about you putting on record any improvements that you think would make the Bill even more effective.

Moya Greene:  Good morning. My name is Moya Greene, and I am the CEO of Royal Mail. I think that the Bill will substantially help matters, in relation to Royal Mail and the stable provision of the universal service. Royal Mail has faced three important challenges. The first is the ability to go forward with the modernisation programme, which is already under way. That requires capital, which is the first thing that the Bill will do for Royal Mail—it will give us access to capital.
Secondly, Royal Mail has suffered for many years under the crushing strain of the pension liability, which is completely disproportionate to the size of the company. The Bill will lift the historical liability.
The third way in which the Bill will be instrumental, as far as the universal service and its stability is concerned, relates to the regulatory framework. The regulatory framework has been very important for creating competition, and I think that everybody knows that a universal service provider must accept a regulatory framework. However, the one that we have had in Great Britain has been a significantly greater burden than those that exist for other universal service providers in Europe. There is a need now, given the dramatic change in the market, for that regulatory burden to be relaxed and to be more in line with what has happened in the market. I think that the Bill is a very positive development for Royal Mail in those three ways.
On improvement, I believe that the Government, Mr Davey and the Secretary of State for Business, Innovation and Skills have gone a long way to understand what is necessary to preserve a high-quality universal service in Great Britain. They have certainly understood very well the dramatic changes in the market and the effect they have had on Royal Mail.
I do not have specific proposals for amendments but, on the change of our regulator to Ofcom, although it is true that the Bill paves the way in every important respect for a relaxation of the regulatory burden, I think that we need to see that happen fairly soon. Time is of the essence in this business, given the dramatic changes that have taken place, and we have been waiting at Royal Mail for a considerable period to see that relaxation take place. I ask you to keep that in mind as we go through.

Q 2

Jimmy Hood: Thank you. We started the questions before asking the witnesses to introduce themselves, for which I apologise. Moya, you introduced yourself in response to that question, but may I ask the other two witnesses to introduce themselves?

Donald Brydon:  Sure. I am Donald Brydon and I am chairman of Royal Mail Group.

Paula Vennells:  I am Paula Vennells and I am managing director of the Post Office.

Q 3

Priti Patel: My question follows on from the previous one. What do you think the consequences would be if this Bill did not go through? You have highlighted regulation. How would that, as well as less regulation, impact upon competition going forward?

Moya Greene:  I think that if the Bill does not go through, you will see a continuation of what have been chronic problems for Royal Mail. Any company needs to have access to capital. This company is in a dramatically changing market. It needs to modernise and the pace of that modernisation needs to accelerate, and that has everything to do with the access to capital. Everything that has been said about regulation, by the Secretary of State for Business and the proposing Minister Mr Edward Davey, captures it very well. So much has happened in the market. We have seen volumes decline considerably in the past five years. We have seen, with the access regime and price control around access, that that contraction in the market has had an even greater effect on Royal Mail, with more and more of the bulk mail business going to our competition.
So, I think that failure to understand just how much competition is there, and the need for Royal Mail to be given a fair opportunity to compete for the business that is there, will further erode the viability of Royal Mail. The consequences for Royal Mail will be negative in terms of its financial viability. The consequences for the universal service will be even greater, because the truth is that we are very proud at Royal Mail to be the universal service provider in Great Britain, but the company needs to have a fair opportunity to compete in order to provide the very high quality service that Great Britons have a right to expect from us. So, if it did not go through, you would see a real peril introduced into the quality of that universal service.

Q 4

Graeme Morrice: May I ask you, Ms Greene, whether you take the view that the only solution to this problem is to have 90% privatisation of Royal Mail and therefore to take it out of public ownership and control?

Moya Greene:  Well, there are other postal administrations around the world that are owned by Governments, but I do not think that they are the highest-performing postal operations. I do not think that they are necessarily the most innovative and the best service providers. I have led another postal operation, as you know, in Canada, which is Government-owned. I can tell you that the modernisation programme that is under way here—I thought that I had led a really terrific modernisation programme at Canada Post until I got to Royal Mail—is truly excellent. The issue of Government ownership is really a problem of having a normal shareholder. When you are in a business such as this, which is in a market undergoing dramatic change, you need to have access to capital continuously to keep up with it. Governments are not normal shareholders. They have many things on their plate, at any time, to deal with. Hearing that a company as big as Royal Mail needs capital is not an ordinary question for a Government shareholder—it is for a normal shareholder, but not for a Government shareholder. It is a problem for a Government shareholder, because we have to compete with so many other Government funding requirements.
So, there are real problems with having Governments as providers of capital to big companies such as this one. The proof is in the pudding. A very large study was done of postal operations around the world. The ones that were owned by Governments had the least access to capital, the least timely access to capital, and when the market is changing as fast as it is in our world, we need almost continuous access to get the modernisation accelerated. So, I do not think that Governments are, generally speaking, the best shareholders for commercial enterprises, and certainly commercial enterprises that have to undergo a lot of change to meet the market.

Q 5

Damian Collins: My question relates to the post office network and is directed primarily to Paula Vennells, but if other witnesses would like to comment I would be grateful for your views. Why do you think there is pressure on post offices to close? I would be interested in your views on clauses 26 and 27, which relate to the shifting from a licensing regime to a regime of general authorisation for postal services. Do you think this will make it easier for new post offices and sub-post offices to open or for more businesses to become involved in providing services through the post office network?

Paula Vennells:  Could I ask for clarity on your first point about pressure on post offices to close?

Q 6

Damian Collins: Yes. We have had a number of post office closures in the network over the last decade. What factors do you think have driven the need to make those closures? What has made post offices individually unviable and created the pressure on the network to reduce the number of offices?

Paula Vennells:The starting point is what the Minister was saying on the media this morning. He has been on the BBC, on television and on radio, confirming the funding that has been announced to the Post Office of £1.34 billion and also the Government strategy to support the Post Office and change the shape of the network. The reason we had closures under the financial and policy regimes of previous Governments was to change the cost basis of the Post Office. The Post Office in the majority of cases has been unprofitable for its operators and has been very difficult to operate economically for Post Office Ltd. The new approach gives us an opportunity to transform the network. What is absolutely important in this new approach is that there will be no closures whatsoever. We have moved away from any pressure on closures, which is why I wanted clarity on your first point.
In terms of what is in the Bill, what is important for Post Office is that we maintain our strong relationship with the Royal Mail Group. Royal Mail Group is over a third of our revenues but the rest of our revenues come from Government and we will be looking to Government to grow the revenues in terms of front-of-office services through Government and also through financial services. Some 80% of customers now can access other bank accounts through the Post Office, so there are tremendous opportunities for us in the privatisation of Royal Mail and the separation of the Post Office. It enables us to capitalise on the services that Post Office is offering to communities.

Q 7

Damian Collins: Do you think there are opportunities for the Post Office to develop even more as a franchise business, as an element within another business? I suppose the sub-post office network already works in that way. Do you think that providing a greater breadth of services or making changes to the way in which you work will facilitate that process?

Paula Vennells:Yes, I do. One of the really exciting things about what the Minister has announced is that it gives us more flexibility to put in the right operating models into communities. We operate a number of different models at the moment. There are approximately 550 franchises already: WHSmith and the Co-op run post offices for us and they are some of our most successful operators because they are good retailers who implement very high standards. The other thing that moving to different models of post office will do is to enable us to open for longer. We are currently piloting a model called Post Office Local, which itself has extended opening hours between 40% and 60% for customers. So there are some real upsides for the Post Office in this.

Q 8

Gordon Banks: Ms Greene, I should like to take you back to part of the answer that you gave to my colleague when you mentioned pensions. How much would be saved on Royal Mail’s current pension payments as a result of the Bill? Is there any other option than to transfer the liabilities to the Government? Are you satisfied with the pension provisions within the Bill and do you have any examples either in the UK or internationally of best practice in terms of pension protection?

Moya Greene:  In terms of pension protection, I think this is best practice. These pension arrangements make it very clear to our people that their retirement income will be protected. There are other cases in the world where postal administrations have had relief on the pension side. Deutsche Post is an example and I believe the Austrian post is as well. The United States postal administration is another. This is not the only example of this kind of relief. What is proposed here, however, is a signal of great security to our people around their retirement income.
In terms of what it will do on the cash side for the Royal Mail, the extra provision that we have to make to the pension to deal with the pension deficit costs around £300 million a year right now, but that is because we have been given an extraordinarily long period of time to pay off our pension deficit. If that pension deficit were required to be retired in a shorter period of time, the amounts would, of course, be much higher. Even at £300 million a year, you can imagine, in addition to the regular payments to keep the pension going, that this is a liability—the deficit now stands at more than £8 billion—on the company that is completely disproportionate to its size.
This is a very significant move, and the Government have made a very important initiative. The provisions in the Bill for the transfer of the pension are clear: they give security to our people; they help us in terms of improving what has been a crushing load to the balance sheet of the Royal Mail; and in the round, they are very positive.

Q 9

Gordon Banks: May I just follow up on that? This is obviously a significant deficit, and you have mentioned that. How much of the rise in the deficit is attributable to the 13 years’ pension holiday that was taken, and how much is attributable to other reasons?

Moya Greene:  I can get you the exact number on the former, but I do not have it with me. Other considerations have been far more important. The volatility in markets and the discount rate are both factors that have been far more important in contributing to the pension deficit.

Q 10

Michael Weir: You have mentioned the universal service obligation, and you said that there is a greater burden of regulation on you than on other universal service operators. Could you tell us a little more about that? Are you seeking changes to the USO?

Moya Greene:  No; we are proud to be the provider of the universal service in Great Britain. We are not seeking changes to the universal service at all. The universal service is protected in this Bill, and that is very important. At six days a week, the universal service in Great Britain is a strong service, and it also covers the full array of products. We are not seeking any change to the universal service. What we have pointed out and, I think, has been recognised by the Government is that the regulatory approach on the economic side has been a different and, I would say, more restrictive approach than has been applied in most other countries.
First, in many countries, for example, only universal service products are regulated. That is not true in the UK where almost everything is regulated. Of the revenues of the Royal Mail, 86% is regulated. The breadth of the regulatory regime is certainly more extensive.
Secondly, the areas in which price control obtain are greater. What we have been saying is that we need to compete on a level playing field. There is a huge number of pressure points in the market to keep prices within reasonable bounds. Those are the competitive pressures that exist in the UK market. The amount to which prices are controlled is a difference.
Thirdly, and perhaps most importantly, we have a regime that mandates that our competitors have access to our network at any point and that they have access with a margin that is protected for them, which is the headroom price control.
In those three areas, you will find that the regulatory approach that has been applied in Great Britain has been great at generating new competitive pressures, which I fairly and fully expect should be there. We should be subject to competitive pressures, but we are at a stage where the competition in the market is very robust. Now, as the only participant that is regulated in this way, we need a fair and level playing field on which to compete.

Q 11

Michael Weir: Prior to Second Reading, you told MPs that the USO must fully cover its costs, which implies that you see a raising of prices for those services that are covered by the universal service. Presumably, the idea of competition is that it would drive down prices in other parts of the service. I wonder if you can expand on that; do you see, after privatisation, a rising price for universal service products?

Moya Greene:No, not necessarily. In fact, private sector operators in postal markets have some of the lowest prices in the world. I think that we are going to be able to hold prices down through two methods. The first is the modernisation programme, which is well under way in Royal Mail and has generated significant change and improved the efficiency of our operation. It is a huge thing—this is a very large company. We are probably mounting a modernisation programme faster than anywhere else in the world.
I know a little about this, because when we were designing the modernisation programme for Canada Post, I took the opportunity to visit other postal services around the world that had planned and implemented modernisation programmes. I feel like I have seen what other countries have done. I look at what Royal Mail has been able to do in just two short years, when they finally got access to capital, and it has been amazing. We have been able to consolidate 10 mail centres. We have been able to introduce innovations, such as 47,000 new PDAs for all of our letter carriers. We have been able to introduce 10 new world-class mail sites. I invite you all to come and visit them—they are now being recognised internationally as some of the best mail processing centres in the world. So, the first thing that will allow us to cover the cost of the universal service is to accelerate that modernisation programme and help us restrain the cost burden that comes with the quality of service that we have in Great Britain.
As I mentioned earlier, many other factors are present in the UK market that serve to restrain prices. There is a great deal of competition in the packets and parcels business in the United Kingdom. There are around 49 other players in that business. In terms of competition in the letters business, you will all know well that we have lost 60% of bulk mail customers to our competitors in a very short period—just four short years. I think that many factors are going to contribute to holding prices within reasonable bounds, but the most important is the modernisation programme that is already well under way.

Q 12

Karl Turner: My concern is about job losses. Do you expect privatisation to result in job losses and if so, how many? What do you envisage the changes to employee conditions will be?

Moya Greene:  I do not expect privatisation to have an impact on job losses. I do not think it matters at all where your capital comes from—whether it is from the Government or the private sector—how many people the business is able to employ. What drives the amount of employment in a business is firstly, its success in the markets that it is in and secondly, the stage that the business is at in terms of modernising. Over the past five years in Great Britain, you have seen a Royal Mail that has had to reduce the numbers of people who are employed at Royal Mail. Automation has that impact, and that has been going on at Royal Mail now for the past five years. With the agreement that we now have in place with our unions, we are able to continue that modernisation. I have had some of the best discussions I have ever had with our union leadership on modernisation since I have been in the United Kingdom. I think that our union leadership really understands our business. It understands that we must modernise, and we have a very good agreement in place to that effect. Modernisation, because it means automation, means that Royal Mail will probably be a smaller employer than it is today, but we will go along with the support of our people at a pace that they can absorb according to the agreement that we have with our unions. At the end of the modernisation programme we will be a more successful company than we are today.
I think that the best guarantee of good working conditions is to be a successful company. If you look at how modernisation has improved our safety record, in some facilities we have improved by as much as 50% or 60% year over year. The most important thing that we can do to ensure that working conditions remain favourable at Royal Mail is to be successful, and to go apace, with our people and our unions with us, to continue the modernisation. The modernisation brings a lot of benefits to working conditions, the most important of those on the safety side.

Q 13

Tom Blenkinsop: You seem to suggest that you have a very good relationship with the trade unions. If I were to put the same question to the general secretary of the CWU later today, would he answer it in the same way? Would there be no job losses, in his view?

Moya Greene:  I don’t know. I think that he would say that we have a good relationship; at least I would be surprised if he said that we did not.

Q 14

Tom Blenkinsop: Forgive me for interrupting you. On the point of whether privatisation will result in job losses, would the general secretary of the CWU say the same as you have said in your evidence? In his opinion, will there be no job losses?

Donald Brydon:  To be fair, the general secretary of the CWU is sitting behind us, and you can ask him. I think that he will say—I will be amazed if he does not say this—that in the past 18 months, and particularly in the past six months, there has been a step change in relationships between the management and the unions at Royal Mail. There is a fundamentally different relationship. The hard-won, difficultly negotiated but nevertheless extremely impressive pay and modernisation agreement that we reached at the beginning of the year has the unions working in partnership with us to modernise the business. That covers the whole expanse of working conditions, numbers and so on. It would be difficult not to say that there is full co-operation. As to whether there is a political issue concerning somebody’s particular view about whether privatisation is a good thing or a bad thing, you must ask him.

Q 15

Tom Blenkinsop: If a private competitor of Royal Mail, such as TNT, took whole or part ownership of Royal Mail, would you foresee any competition issues?

Moya Greene:  I don’t know, because that is a legal question that would require me to take advice on EU and UK competition law, but I would not be surprised. I am happy to get back to you, but I have not been advised on that. I know that the EU competition regime is quite strict.

Q 16

Tom Blenkinsop: Just a further point: in the search for further capital to invest in the business, is it not possible that privatisation could lead to a monopoly and therefore potentially breach European competition legislation?

Moya Greene:  I don’t think so; no. It really depends on how and from where capital comes into the company. I do not see any state in this market where there will be less competition. I think there will be more competition, because it is a much broader market than the traditional mails market. It is a broad communications market. We are losing a great deal of our traffic to the electronic side of the communications business. These disruptive technologies are probably going to be a more important mainstay of the competitive feature of the market going forward. So I do not really see the source of the capital into the UK as being the main driver of how much competition exists in the market.

Q 17

Gregg McClymont: I have a question for Miss Vennells and a question for Mr Brydon. Miss Vennells, how many post offices are there currently in the UK? How many of those post offices are currently making a profit?

Paula Vennells:  There are 11,900 or so post offices in the UK at the moment. Approximately 4,000 of those post offices would be making a profit for the agents who run them and would be economically viable for Post Office Ltd.

Q 18

Gregg McClymont: So 8,000 are not economically viable as we stand?

Paula Vennells:  Yes. It depends on how you view that particular statement, but what happens is that operators will close their post offices early to try and make them economically viable. If you are a sub-postmaster and you are running a convenience store—Budgens is a good example—they will have post offices with fixed counters in them that will close down at half-past 4 or 5 in the afternoon, so that they can manage their staffing costs. We are planning to change the shape of those operating models, so that we can actually consolidate the post office on the counters. What I would not want the Committee to understand is that 8,000 post offices are not viable. They are entirely viable if we can put the right operating model in place.

Q 19

Gregg McClymont: They are not currently viable?

Paula Vennells:  We do not see the profit and loss account of the agent. That would be our understanding from the conversations that we have had, but we do not see those financial figures.

Q 20

Gregg McClymont: Mr Brydon, how many seats are there on the Royal Mail Group board? How much representation does Post Office Ltd have on that board?

Donald Brydon:  I need to add it up in my head. There are, I think, seven non-executives and four executives. I am chairman of Post Office Ltd. Paula is the managing director, and she is on the board. Dave Smith, who is the chief customer officer of the group, also has a role that reports to Paula for Post Office Ltd. All the non-executives have responsibilities across the entire business. So you could say that it is heavily represented on the board, and Moya is the chief executive of the group to which it reports.

Q 21

Gregg McClymont: I am sorry; forgive me for being slow. I did not quite understand that. Paula Vennells sits on the board from Post Office Ltd. Does anyone else from Post Office Ltd sit on the board?

Donald Brydon:  I do. I am the chairman of Post Office Ltd.

Q 22

Gregg McClymont: And the chairman of Royal Mail Group?

Donald Brydon:  Correct. But you must remember the executive reporting lines inside the group. Paula reports to the chief customer officer of the group, who reports to Moya. Both of them are also on the board, so they have a significant influence. We hold the Post Office board itself separately to give detailed and further examination and that has one of the non-executive directors on it as well.

Q 23

Gregg McClymont: Okay. I take that, but I am still somewhat unclear.

Donald Brydon:  I am happy to send you a little map, if that would be helpful.

Q 24

Gregg McClymont: That would be helpful. Finally, was it the case that Paula Vennells, or whoever was in her position, would report directly to Moya Greene, but she now reports one step down the chain?

Donald Brydon:  It is a temporary arrangement, which will end in a few months’ time. We have just gone through a change, as you are probably aware.

Q 25

David Wright: Ms Greene, you have talked about the modernisation programme. Where are you with that programme? What is left to do? Is it months or years until the end of that programme? Some would say that we never end a modernisation programme. What is your target point? What do you want to achieve? Where do you want to get to? How does that impact on the value of the company in terms of its disposal? How much do you think that the company is worth? Is this a good time to sell it? Should we be waiting to see the impact of further modernisation? Is it a good point to go to market? Who is going to buy it?

Moya Greene:  Let me talk about the modernisation first. The modernisation really got under way in earnest about two years ago. It took an amazing amount of planning. You really have to think about how big the estate is: 66,000 routes; 155,000 people; 69 mail centres; the biggest fleet in all of Great Britain; the biggest network to cover of any company; 11 regional district offices and about 1,200 delivery offices. That is a massive estate, and you are talking about consolidating that estate based on your best predictions on where volumes are going. At the same time, you will be changing the entire delivery apparatus of the country. You will be ensuring that people can use PDAs, for example, to introduce new technology. Some 47,000 PDAs were introduced in one year.
In two short years, we have introduced world-class mail, and believe me, they are truly world-class facilities. I want all of you to come to see those facilities. We have managed to consolidate from 69 mail processing facilities to 59. By the end of next year we will have gone from 11 district offices to three. We have outfitted the entire delivery operation with new technology to meet the challenges and the change that we see in the market. That is a massive amount of change. We have taken out about 4.5% of our operating hours in the past year and a half. We have reduced by about 10% the number of miles covered by our network. So it has been a massive programme. For people to get that programme up and running and to where it is now in two short years is, in my experience—I have looked at modernisation programmes mounted in other parts of the world—simply laudable, and I say that as someone who has been at the company for 14 weeks.
Where is this going? We still have a long way to go, because it is such a large estate, and we are trying to build it, not for the next five years, but for the next 20 years. We still have a good five years to go before the estate comes to the size that we want, and the network covers the area that we want. Every one of those 66,000 routes will have to be restructured, which is an amazing undertaking for any company. I do not think that any company in the United Kingdom faces a challenge that is anywhere close to that faced by Royal Mail.
Do I think that the company has value? I think that the company has huge value, and I have been so impressed. I have been to Cardiff and Glasgow, and I have been on the night shift at Mount Pleasant. I have seen the absolute best mail processing centres in the world, and I have also seen the worst, in which mountains and mountains of mail are still handled manually—the people have their heart and soul in the business, but the mail is still handled manually. We still have a long way to go, but if you see the heart and the amount of change that this company has absorbed in two short years, you have to say to yourself that, absolutely, this company has huge value.
Will the company sell? I certainly hope so. We need the capital, and I think that we have a great story to tell. I think that the people who will be interested in this business will look at the modernisation plan that has been driven by one of the best transformation executives in the United Kingdom—my partner, Mark Higson, has been driving the change in our company—and they will say, “That is a story unlike any other in all the transformations that all such businesses have had to undergo.”
Should we wait? I think we should sell the company and get it the capital that it needs as soon as we can. I hope that that will be some time in 2012, when we will be through this legislative process and the other factors that are important to a sale, such as a signal on how much regulatory relaxation will be available for the company and for investors to turn their minds to. Yes, I think that it will sell, mostly because it is a great company with a great mission.

Q 26

David Wright: Are you saying that we have to have a stronger signal on the regulatory framework before the company has an enhanced value? That seems to be what you were saying at the end of your remarks. Do you think that the Bill does that and delivers that? Is there more to do? Does this give us a framework through which you can secure the best possible value for the company? Is there a need to progress further with the modernisation process before you can secure best value? Should we wait? Should we sell the company in five years, at the end of the period of modernisation that you have outlined?

Moya Greene:  No, I don’t think so.

David Wright: These are massively important questions, in terms of the value of this organisation.

Moya Greene:  I agree.

David Wright: And on the basis of its historic value for the public of this country.

Moya Greene:  I don’t think that we should wait too long. Investors want to be confident that we can do what we say we will do. There is enough there now for them to feel certain that we can modernise and transform this company. There are other important aspects—relief from pension liability is a very important aspect of successful access to capital—that require you, as parliamentarians, to approve this legislation. On regulation, we have an excellent understanding of the regulatory requirements from the Secretary of State for Business, Innovation and Skills and from Mr Davey. Those have been very well signalled.

Q 27

David Wright: Can you outline what they are, then? It is important for us as a Committee to understand that, because conversations are, quite frankly, no good to us here. We need some information on what they are.

Donald Brydon:  There is a terrific example in the Secretary of State’s speech on Second Reading, when he said:
“Royal Mail will not subsidise its competitors, protections will be built in and there will be a genuine regulatory level playing field in a way that has not been…true in the past.”—[Official Report, 27 October 2010; Vol. 517, c. 362.]
Those are precisely the sorts of signals that we need and our people need—all of our people who feel sometimes that they do not always get a fair crack of the whip, throughout the whole organisation. Those are the sorts of signals that investors require, and they are in black and white because the Secretary of State said that.

Q 28

Graeme Morrice: A question to Ms Greene: I admire your enthusiasm for your business, and I listened carefully to what you said about how, currently, we have world-class services, how we have done a lot over the past couple of years and how we have a modernisation plan to take us forward in the next five years. Given that the Bill was only published in the past couple of weeks or so, is your five-year modernisation plan predicated on privatisation?

Donald Brydon:  It is predicated on the need for the capital, because without the capital we cannot progress. The company cannot invest in innovative new services, it cannot modernise its fleet and it cannot modernise its equipment without capital and, as we all know, the Government do not have a lot of it.

Q 29

Graeme Morrice: What if the law is not passed? What would you do?

Donald Brydon:  Well, we’ll soldier on, and you can ask yourself what has happened to Royal Mail over the past 20 years.

Q 30

Richard Fuller: Ms Greene, you mentioned a number of benefits to Royal Mail from the Bill. I would like to focus on the area of capital requirements. Obviously, there are a number of variables that you have to deal with, but in your base case assumptions, what do you think the extent of the capital requirements for Royal Mail will be over the next five years? What proportion, do you think, will the group be able to raise with its own resources? I think you mentioned—you may want to confirm this—some of the concerns you have about relying on the Government for accessing that needed capital, but do you have concerns about accessing private capital and what that might mean for the group? In particular, given that on the Post Office Ltd side there is an approach towards mutualisation, what thoughts do you have on the Royal Mail side about extending employee ownership beyond the Government’s proposals?

Moya Greene:  On capital and the amount needed, I do not have a precise amount. We are in the process of doing that work now, but I have a general amount. I would like to see the company have between £2 billion and £3 billion of capital to accelerate the modernisation, to diversify the revenue stream and to improve the technology estate of the company.
On whether I have concerns about private capital, no. I have worked for great Government-owned companies and I have worked for great companies that have been owned by the private sector. It has always been my view that the source of the capital is not a determinant of whether a company is a good company. It is access to capital when you need it and access to a shareholder who is concerned only about the success of a company that are the important things for a successful company. I have to say that I think it is easier to find that kind of single-minded view about the success of the company and continuous access to capital where that is what the shareholder actually does. We know that Governments are asked to do many things and they have competing priorities on their tables, so I do not have concerns about private capital. In fact, some of the best postal operations in the world are privately owned.
On employee share ownership, the signs in the Bill are very positive. In every company that I have ever been associated with, employees having a stake in the success of the company has been a positive development. It helps align our people with their own futures and the things that you have to do as a company to keep that future secure and keep the company in a good place, as far as the competition is concerned. In my personal experience, employee share ownership has been very positive.

Donald Brydon:  The company has argued for employee share ownership for a long time. I long for the day when we announce a dividend and there are cheers in all the sorting offices because the employees have participated in the profitability of the business.

Q 31

Gordon Banks: First, Ms Greene, you have talked about the progress that has been made in modernisation and therefore, in some ways, access to capital. You were very complimentary about the progress made in the past couple of years. Are you surprised that that could be delivered through an organisation that is basically state-controlled? You then talked about hopes for a potential 2012 sale, but also about being slap-bang in the middle of a modernisation programme that might last for another two or three years after that. At that point, how much investment would that new buyer have to put in to complete that modernisation process? We have discussed the fact that you cannot modernise once and stand still; you have to move the business forward. Do you think that future modernisation processes will be even deeper and quicker than that of the past two years, or the one from 2008 to 2015?

Donald Brydon:  May I answer the first part for her? The modernisation that has taken place so far is a remarkable achievement, but it is very late. Compared with any other postal operator of quality or substance in the world, the Royal Mail is at the end of the queue in its modernisation, and Hooper said so in his report. One of the reasons is that it took one and a half years to negotiate the £1.2 billion needed for modernisation. In the world of private capital, a board could take that decision quickly and execute it perhaps within a month. One and a half years to negotiate the money, terms, strings and implementation slows the entire process down.

Q 32

Gordon Banks: So do you see it being quicker to end in the future, after 2012, if there were a sale then, and would it be quicker to realise any future modernisation plans?

Donald Brydon:  More flexible, and the reason why that is so important is that five or six years ago, nobody anticipated that the postal markets would be declining at the rate they are now. A Postcomm report actually predicted growth in the postal markets only a few years ago, so you have to react quickly. In a year and a half, in a relatively fixed-cost business, you are getting killed if your revenue is falling. You have to be flexible and quick. A system that takes a year and a half to agree to get capital to do things just does not work.

Q 33

Gordon Banks: So, on the following part of my question, 2012 would be the middle of this five-year period—how much investment would need to be put in at that point to complete this process?

Moya Greene:  We do not have the precise amount but by that time, we will have put about £2 billion into the modernisation. We will still have a ways to go. I am just doing those numbers now on the precise amount of capital that we need in every area.

Donald Brydon:  It is not a bureaucratic question. It depends on what the market is, and on our ability to generate new products and new services. New services such as Track & Trace, which did not exist two or three years ago, bring new revenue.

Q 34

Gordon Banks: Yes; but you need a business plan. You can modernise a business plan as you go along, but you must have a plan. You have to base it on something.

Donald Brydon:  Absolutely, and we have been doing all that work.

Q 35

Gordon Banks: I know that you are number crunching at the moment, and if it would be possible before the end of the Committee to get some guidance on that it would be useful.
I would like to ask Ms Vennells a quick question. Bankfoot, in my constituency, does not have a post office. It has not had one for a number of years, although it is supposedly technically within the network. What in the Bill will give Bankfoot a post office?

Paula Vennells:  It is difficult to comment on an individual case, and I am happy to look at that one with you personally. If we decided it was appropriate to put a post office there because there was a requirement, we would look—irrespective of the Bill; the funding and the policy statement behind the Post Office are important in this case—at the type of operating model that we could put in there. We now have a much wider range of operating models, which will make the whole network viable. That is the whole point—

Q 36

Gordon Banks: But no one wants to take that up just now, so what in the Bill will change that?

Paula Vennells:  I have just offered to take it up for you personally.

Q 37

Gordon Banks: Okay. So you do not see anything in the Bill that is likely to increase the network in areas where we should already have post offices?

Paula Vennells:  I hope, as a result of the funding and the different models that we are now piloting, that we could increase the number of post office access points across the country. We would only do that where we thought the demand was there, and it was viable. That, in a sense, is something that we would look at in the Post Office anyway. It is not something that comes out of the Bill; it comes out of the funding package and the strategy for the Post Office.

Q 38

Gordon Banks: I appreciate that, and I am sorry to labour the point. We should have a post office in Bankfoot, and the Post Office admits that we should have a post office there, but we do not have one. This is a major piece of legislation affecting the relationship between the Post Office and Royal Mail. I am, therefore, looking at this as a flag for other people to ask what in this piece of legislation will give Bankfoot and the many other Bankfoots the opportunity to have what they should have, and what you think they should have—a post office.

Donald Brydon:  There is a simple answer to your question: £1.34 billion of new funding is going into the Post Office, which the Government have just agreed, even in these extremely difficult spending times. That money will now be applied in the most sensible way possible. It is not fair to ask Ms Vennells for a direct answer about one post office, when you could get the same question from every other village in the country.

Gordon Banks: No. As you can understand, I used it to wave a flag for the many Bankfoots.

Paula Vennells:  The answer is that as we transform the network over the next five-year plan, we will review every single area and decide where the post offices are required and what models are put in there. If one is required and we have a model that works, one will go in. If there is a particular issue in Bankfoot at the moment, I am happy to take that up for you personally.

Q 39

Tom Blenkinsop: Coming back to the modernisation element, you have just reiterated that more than £3 billion from the public purse is being put into the process. With the sell-off of Royal Mail, the public want to know that they are recouping as much of the value as possible. In your opinion, would the sell-off of Royal Mail accrue more value at this moment, when modernisation is still taking place, or after modernisation has been done?

Moya Greene:  It all has to do with the state of the market at the time. I do not think it has to do right now with the state of the modernisation plan. Modernisation is important to an investor.

Q 40

Tom Blenkinsop: It is important to the public to know that they are recouping the money that they have already invested, isn’t it?

Moya Greene:  Well, I think it is most important to the British public to know that they have a viable universal service provider. That is the most important thing. The most important thing for the universal service is to have a viable, well capitalised modern provider. For the investor, it is most important to know that the service that is being provided can be provided with a level of investment that will give them a return. Where does that intersect with the modernisation? Our investors in the future need to know that we can do it. They need to know that we have a reasonable game plan that is achievable. I think that by 2012 we will have completed a sufficient amount of what is a very complex plan for them to know that.

Q 41

Tom Blenkinsop: Coming back to your point on the game plan, would that put restrictions on who you would see as an adequate potential owner of Royal Mail?

Moya Greene:  I do not want to put any restrictions on who might provide the capital at this time. It is very premature. I think we should wait until 2012, access the markets, keep an open mind on who the potential capital providers might be and go with the best capital offer that is available to us at that time.

Q 42

Nia Griffith: Can we come back to the concerns expressed about the importance of that third of the income that comes from the Royal Mail which, again, is underlined in the Government’s latest statement this morning, and the need for a long-term commercial contract? How would that work with a privatised Royal Mail? How do you oblige a privatised company to make that contract with you rather than going to a big supermarket or high street chain and rather than reducing the numbers perhaps to those 4,000 that might be viable?

Paula Vennells:  There are a number of answers to that. First, we have a very strong commercial relationship with Royal Mail and that is something that both businesses would want to continue, so as we transform the post office network we will make it into something that Royal Mail will want to use. It will not want to go anywhere else because first of all we have the massive rural reach which it would be very difficult for it to get somewhere else. It will get all this through one distributor. We will be able to extend our opening hours. Royal Mail will be interested in this if we can provide the right service for its customers, such as things like Post Office Local, which can open at 6 o’clock in the morning and close at 10 or 11 at night. The post office services will be open for all that time, serviced in a way that is economically viable for the operator. Those are the sorts of service-level agreements that we would be discussing with Royal Mail. I do not see other retailers as a particularly serious threat, because Post Office has an enormous amount of expertise in this area, and with the reach and the way we will change the network I am very confident that we will have a very long and strong commercial agreement with Royal Mail, but I would ask my colleagues to comment on that.

Moya Greene:  I would like to comment on that. For me it is unthinkable that we would not have a very long-term relationship with the Post Office. Here is a group of people—the best and strongest network in the country, by any yardstick, with 11,900 outlets—who are committed to and want to sell our products. This was something that came up in a conversation very early on when I first met Mr Davey. To me it is unthinkable that we would ever have anything but the very strong relationship that we have now with the Post Office. I admire our other partners like WHSmith; of course I do. But that is not the Post Office. The Post Office is everywhere with a great brand. It is a group of people who are committed to postal products, who know postal products, who offer a fantastic service in their communities, a larger range of service in their communities than any other retail operator—

Donald Brydon:  And have experience of postal matters.

Q 43

Nia Griffith: May I pursue that a bit? First, we know that some other competitors have been snapping at the heels of the Post Office for Government contracts and things. So we know there are people out there who are potential competitors and rivals. I appreciate your tremendous dedication to the post office network, but Royal Mail may move on and other people who do not have the same view may come in and take your place. Is there any way that a private company can be obliged, other than through a voluntary agreement, to be in a contract with a particular provider rather than having the choice to go to whichever provider they want? Would not the only way to safeguard that be to keep a majority share of Royal Mail in public ownership?

Moya Greene:  In answer to your last question, I would say no, they are not related at all. The problem with Government ownership is what I have mentioned in the past. Neither one of us is able to pursue the business in a timely way with the kind of competing priorities that Governments have to deal with. So I do not think that that is the answer. I think the best answer is for both of us to be successful. If both of us are successful—if the Post Office continues to be successfully embedded in many communities across Great Britain, to be knowledgeable about Royal Mail products and to be desirous of selling Royal Mail products along with other sources of revenue to keep them viable, which is what Mr Davey and his colleagues in the Government have placed at the heart of the policy statement on the Post Office—then the relationship will for ever be strong and as strong as it is today, because it is very useful for Royal Mail.

Q 44

Nia Griffith: But it is essentially a voluntary relationship, and it cannot be made obligatory.

Donald Brydon:  No, it is not, because at the point of privatisation we will have negotiated as long an agreement as we are allowed.

Q 45

Nia Griffith: What sort of length of time?

Donald Brydon:  As long as we are allowed. When we become a private company, we will have a robust, long-term agreement with the Post Office.

Q 46

Nia Griffith: How can we be sure of that? How can we be guaranteed that?

Donald Brydon:  I have just said that we will do it.

Q 47

Nia Griffith: What do you mean by long term?

Donald Brydon:  As long as possible.

Q 48

Nia Griffith: So?

Donald Brydon:  You are the law-makers, not me.

Q 49

Nia Griffith: Are you suggesting that we should enshrine in law the length of time that that agreement should last?

Donald Brydon:  When Royal Mail comes to be sold, the agreement between the Post Office and Royal Mail will be enshrined in the prospectus. From my point of view, from Paula’s point of view, from Moya’s point of view and from George Thomson’s point of view, we all want that agreement to be as long as is legally possible.

Q 50

Nia Griffith: Effectively, are you saying that potential purchasers will be able to see that, when they purchase Royal Mail, they will automatically be entering into an agreement with Post Office Ltd? When you think about the timing of that agreement, you should think of the sub-postmasters and sub-postmistresses who have put their life savings into post offices. Ten years is nothing, because they will be worried about putting money in and then finding that they cannot sell later on. What long term would be realistic for people genuinely to be able to continue setting up new post offices and taking over when people retire, and so on?

Donald Brydon:  There is not a 50-year agreement today. All we can do is create the longest-possible legally permissible agreement, and we will do that.

Q 51

Gregg McClymont: We have heard some references to other mail services across the world, but what are the best examples of successful mail companies or mail services worldwide? Please give two or three examples.

Moya Greene:  That depends on the dimension. I am going to say something that probably only a foreigner is well placed to say. I think that the UK mail situation, in which Royal Mail is your universal service provider, is excellent. People in the United Kingdom enjoy a six-days-a-week service, and they enjoy that service with overnight delivery. They enjoy universal service protection, which covers the full panoply of products from letters to packets, registered mail and insured products. They enjoy access to postal services that is very good indeed, with 11,900 post offices across the country.
I ran what I thought was a great postal operation in Canada. As you know, we have a lot of geography to get through, and a lot of bad weather to deal with, in Canada, too, but we did not have an overnight requirement; we had a two-day requirement. We did not have a six-days-a-week requirement, and we did not have such a large battery of postal products protected as part of a universal service. I am going to say that, here in the UK, Royal Mail is an excellent service provider, and I invite you to look at the fair depictions of that service, which, by the way, only we put out for public consumption—only we do that, not our competitors. I think that you will see that that service is very good.
If you ask me to look around the world, there are other good service providers. I think that Deutsche Post is a very good service provider. I think that the service provided in Sweden and Denmark is very good. I think Austria is a very good service provider. Those are three that I know.
On access to capital, whether from the Government or the private sector, I think you will find that the most efficient service providers, and the best and most innovative, are the postal operations that have continuous access to capital, and they tend to be the postal operators that are in the private sector.

Q 52

Gregg McClymont: Two things arise out of that. First, as you were giving that encomium to Royal Mail, it struck me that we seem to be privatising a very successful Government-owned industry. On the second more important point, I was interested that you mentioned Deutsche Post. Is it the case that Deutsche Post has to work under a set of criteria which protect the number of post offices, and that various access criteria are actually written in statute? In the Bill, as it stands, there are no such criteria. Is that the case?

Paula Vennells:  That is because the access criteria that apply to the Post Office are separate from the Bill. The Post Office is run separately, and we are accountable to Government separately for access criteria which, in the announcement that Ministers made, do not change. So 99% of the population in urban areas still need to be within a mile of a post office. In rural areas, that is 95%, and postcodes in certain areas are protected as well. That remains completely unchanged. Any threat to the post office network has been taken away by the funding in the Government policy statement on the Post Office, which is separate from the Bill. The Bill helps the Post Office, because of the potential separation, and enters us into a different area. We can start to look for more business, which the Government have talked about, in terms of front office for Government, and how we restructure our network. The network access criteria remain unchanged.

Q 53

Gregg McClymont: If 8,000 post offices are not currently economically viable, that £1.3 billion will have to go a long way. Would that be a fair way to put it?

Paula Vennells:  Those post offices will be viable by the end of this plan, because we will have changed the way they work. Let me try and paint a picture for you. If you run a post office today in a convenience store, you have two or three counters that are separately staffed. They are surrounded by fortress glass, so they are very difficult from a customer service point of view, and they probably take up too much space in your convenience store. If we are able to put in the new main post office models, or the post office local models, those agents will be able to change their staffing to make it much more flexible to use the same staff across the different areas. They will gain back more space in their retail outlet to give over to whatever they see as more profitable for that space. They will be open longer for their customers, because the staffing is more flexible, so customers will get a better deal. Our suppliers, both in terms of Royal Mail and the Government, particularly in the area of Government services, will benefit hugely. This is really, seriously good news for the Post Office.

Donald Brydon:  May I add one point? You made a very good joke about the success of Royal Mail but actually, if you think about our people, we have got a fantastic work force. I have never met, up and down the country, a work force that are more dedicated to their customers and those they serve. They are going through phenomenal change. Almost every single person in Royal Mail is having their job changed one way or the other. Nobody likes change. Asking everyone to change the way they work, the way they operate and the conditions in which they operate—in the knowledge that there is probably going to be less than there are today—is incredibly difficult. Yet our people go out day after day after day and deliver 68 million items every day, six days a week. That is why we talk about it as a successful company. I sometimes get just a wee bit depressed, because there is a sort of national hobby of knocking Royal Mail. But if 95% of all the first class mail arrives the next day, even if you posted it at 6 o’clock or 5.30 at night, and if we hit targets in the higher 90s—much better than most European operators—we are actually being pretty successful. The problem is, we don’t have enough cash, and that is what this is all about.

Q 54

Gregg McClymont: That’s the bottom line in your view?

Donald Brydon:  It is.

Q 55

Gregg McClymont: Royal Mail is operating pretty successfully, the modernisation programme is going very well, but—

Donald Brydon:  It does not have a flexible-enough owner and it doesn’t have enough cash.

Q 56

Gregg McClymont: May I just raise the issue of the flexible owner? Moya Greene mentioned a number of times that Governments have other priorities. But on that argument, the Government would operate nothing commercially whatsoever, because Governments always have other priorities.

Moya Greene:  There is a lot to be said for that.

Gregg McClymont: Thank you for that. That is an important point. Your position is that the Government should have no role in the market whatsoever.

Moya Greene:  I think that Governments have a huge and powerful role in the market. They need to, because markets are certainly not always able to provide stable service. That is where regulatory approaches and finding the right balance between regulation and the number of participants in a market to make sure that services are stably provided comes in. I do not think that you necessarily need to have Governments owning commercial businesses as well.

Q 57

Gregg McClymont: So, in your view, as long as you have a strong regulator then the public interest will be served.

Moya Greene:  I think so. In most cases, yes, that has been the case.

Q 58

Damian Collins: I want to go back to Paula Vennells on some of the points made about the post office network. With the resolution of some of the business issues that you have identified within the network plan, do you think that that might make the Post Office attractive to new entrants? Presumably, the Post Office brand is still one of its great assets. Retailers that want post office counters within their business presumably do so because they believe that they make a positive contribution to the performance of the whole business. If there are cost elements that can be restructured, do you think that there will be more people coming to you saying that it now might be viable to open a new one?

Paula Vennells:  Yes. I think this comes back to Mr Banks’s question as well. If we have the funding and we can sort the network out, I cannot see why you could not put post offices in more locations. We would certainly have more commercial partners interested in it. There are volumes in this. There are models that currently work very well. WH Smith runs a fantastic business and so does the Co-operative. Martin McColl, in several of its stores, makes good returns from the Post Office. You have to have models that are flexible to different locations.
In terms of new entrants to the market, I would make a play that the Government and local government have to be within that category. We are already piloting a number of different approaches. The Minister, who has been incredibly supportive, and a number of Government Departments are now realising that the Post Office can actually save them money. They can put more customers and more footfall through the post offices to keep them sustainable. This is a real win-win situation for us.

Q 59

Damian Collins: Is the Bill helpful in terms of making it easier for a new entrant to go through that process and get a counter or post office set up, be that a village hall, a pub or a retailer such as WH Smith?

Paula Vennells:  What is important for the Post Office are the policy statement, which the Minister has issued, and the funding. The Bill is more important in terms of how it helps Royal Mail on the letters and parcels side.

Donald Brydon:  That is except for one thing, which is that the mutualisation model that the Minister has talked about will bring a greater alignment, in the widest sense, between those who are operating the post office and the owners. It will be in their interests to make access easier and more flexible. To that extent, the Bill is actually helpful.

Q 60

Damian Collins: For those of us who are concerned about post office numbers, who would like to see more of them and who would debate not only about whether we can sustain the level that we have, but whether the network can grow to meet demand, the Bill can only help.

Paula Vennells:  It is positive.

Jimmy Hood: Order. This will probably have to be the last question, because we are running out of time.

Q 61

Edward Davey: Moya, I want to bring out something that you have touched on once or twice with regard to your comments on the world class mail project and how significant that is. Could you say a little bit more about that and how it may relate to the employee share proposition that is in the Bill? I, with Mark Higson and his team, have been impressed with how every single Royal Mail employee whom I have met for this project has been inspired and involved by it, and, in many ways, they are enjoying their work more than they have ever done before. I am passionate about the Bill and the employee shares, and I want to try to take some of that passion and give some of the benefits of success back to the employees. Could you say a little more about the how the world class mail project is affecting the working lives of individual employees?

Jimmy Hood: Moya, you have less than one minute to answer that.

Moya Greene:  It is changing everything. It is helping employees bring skills and talents that they have amassed in other areas to their jobs, which, in the main, can be repetitive and pretty boring. It is helping them to figure out what needs to be fixed, to not wait for somebody else to come and fix it, and to structure the projects themselves that will fix what needs to be fixed. It is in place now in 10 of our facilities. It has been a huge tool to help our people come to an understanding of what they need to do to be successful in all aspects of handling and processing of mail. It has had a huge impact on safety, and it has reduced costs inside individual facilities.

Jimmy Hood: Order. We have run out of time, and I must draw the evidence session to a close. I thank our witnesses for coming this morning.

Witnesses: Billy Hayes, General Secretary, Communication Workers Union, Dave Ward, Deputy General Secretary—Postal, Communication Workers Union, Brian Scott, Assistant National Secretary, Unite, and George Thomson, General Secretary, National Federation of SubPostmasters, gave evidence.

Jimmy Hood: Welcome to the evidence session. May I ask you briefly to introduce yourselves, and we will proceed straight to the questions?

Billy Hayes:  My name is Billy Hayes and I am the general secretary of the Communication Workers Union.

Dave Ward:  My name is Dave Ward and I am the deputy general secretary with responsibility for postal issues from the Communication Workers Union.

Brian Scott:  I am Brian Scott and I am the assistant national secretary of Unite.

George Thomson:  My name is George Thomson and I am the general secretary of the National Federation of SubPostmasters.

Q 62

Priti Patel: My question is for Mr Hayes. We have gained an insight from our last witness into the working relationship between Royal Mail and the Communication Workers Union, and we have heard some very positive comments. For our benefit, will you give us an insight from your perspective into your current working relationship with Royal Mail?

Billy Hayes:  May I say that we are very uncomfortable about the fact that we have been asked to give evidence alongside representatives from Unite and the National Federation of SubPostmasters? We feel as though we are being crowded into one session, and I just want to make that point. In previous Committees where we have been asked to give evidence, other organisations have been treated separately. For example, Royal Mail Group has been allowed to do its session, and so have other bodies. We think that you are squeezing us for time to give our evidence. I will answer the question, but I just wanted to make that point.

Jimmy Hood: You have made your point, Mr Hayes.

Billy Hayes:  I have been a full-time officer for the CWU for 18 years—nine years as a national officer for delivery staff—and for 18 years prior to that I was a postman. Relationships at the top of the company have been very good and, in my experience, have been so even during troubled times. Dave is better able to speak about day-to-day industrial relations issues, but in the relationships between the companies we have always worked well together.

Dave Ward:  We think that relationships are fundamental to the future success of the business. We have certainly put a lot of energy and time into shaping the agreement that we have just reached to reflect the importance of improving industrial relations and employee relations.
Where are we at the moment? I think that the relationships are improving at a national level, because we are sharing better information, we are debating issues and we are trying to resolve problems. We are trying to deal with the deployment of modernisation, which is not easy. I do not think that that is yet visible at local level, and we could do more to make those relationship improvements visible to employees. When we reach subsequent questions about employee ownership and similar areas, I will be able to expand on that.

Q 63

Priti Patel: Are there any particular challenges concerning the working relationship specific to modernisation?

Dave Ward:  I listened to the end of Donald’s evidence, and I think he is right that nobody should underestimate the scale of change that is going on in Royal Mail. It is huge. I think it is probably more change over a sustained period of time than any other company in the UK has had to deal with from an employee point of view. We need to recognise that the pace of change can only be dictated by what people can cope with, if you are going to do it right. We have to spend more time making sure that employees get input into the type of change that happens at local level. I do not think we have got that right at the moment. It is still a little bit too much command and control from management, and we need to get the balance right in how we implement the changes locally. For me, the choice is not whether or not we are going to change. I think people have bought into the fact that we need to change now and that is right across the company. Not everybody likes that, because it is a lifestyle change for many people. But I think we could do it better if we were to engage employees more in shaping the change at local level.

Q 64

Graeme Morrice: I was questioning the representatives from Royal Mail about modernisation earlier, and they spelled out an attractive picture of world-class services, and how things have improved greatly over the past two years and how there is a plan taking us forward for the next five years. I asked whether all that is predicated on privatisation. In effect they said yes, because the process relies on the capital. It may not be my view that it can only be done through private means, but obviously you believe in taking the business forward and support modernisation. What is your vision of the future over the next five years, without the need to privatise?

Billy Hayes:  Dave will go into greater detail, but Richard Hooper said that modernisation could not be achieved in the public sector, but he was wrong. We were told that the CWU and Unite could not embrace the change, but he was wrong. We secured an agreement. Dave headed up those negotiations. There is a three-year deal moving the company forward. On the point that modernisation cannot be achieved in the public sector, that is quite simply wrong and we have already heard a bit of it. Dave is dealing with the detail and he headed up those negotiations.

Dave Ward:  Where we probably differ from the view of the Government is about what the problem is that we are trying to solve. With due respect to the Government’s position, and that of successive Governments, they have not always asked the right question. They have been quick to put forward a solution. But if you examine the problems in the company, we are convinced that all the problems, although the challenges we face are great, can be overcome within the public sector. Let me explain how that can be done.
First, there is a misconception about the modernisation programme and the funding for it. As far as we understand it from dialogue that we have at a strategic level with the business, the programme is fully funded. The agreement we have reached, which brings in new machinery, new equipment and new methods, is a fully funded programme. What is also not understood about that agreement—again, I respectfully say to the Committee that it would be good as you go through your evidence over the next few weeks to look at what it says, because it addresses a lot of the fundamental questions—is that it is about changing the shape of the company.
We accept that the digital revolution is out there and is a challenge for Royal Mail. This agreement is going to change the shape of Royal Mail in order for us to respond to the opportunities that exist in the digital revolution. I do not believe that privatisation will do that. I think that delivering that agreement properly would do that. When it comes to the question of the need for further access to capital, I think we would accept that the company clearly needs to be able to access capital. Our point is that there are other ways of achieving that. If you are going to proceed with this type of Bill, the starting point of that debate needs to be a bit clearer about how much and what for. I do not think that those questions have been properly answered at the moment. What we hear is the company saying that there is volume decline. Let us be clear; yes, there is volume decline. Sometimes, we disagree on the extent of it, but the fact of the matter is that the modernisation programme takes it into account. It is built on an agreement that will produce profit margins of something like 7%, where currently it is 1% over turnover. That agreement delivers significant new profits for Royal Mail over a period of three or four years.
On the pension deficit, the Government have accepted that they will try and deal with it, which we welcome, but we have serious concerns about the detail, and our lawyers are looking at that at the moment in respect of members’ pension entitlements. However, if you take away the pension deficit, the fact is that it throws up potentially £300 million a year that the company has said that it could afford, in an agreement with the trustees, which could now be reinvested back into the service. So, that is part of the solution of access to capital going forward.
Similarly, if you change the access regime, or the regulatory regime—I think most people would accept that that is not a fair regime to Royal Mail. I think Postcomm got it wrong in the way that it did the balancing act between providing the universal service obligation—with a level playing field—and introducing new competition. The truth of the matter is that Royal Mail is subsidising its competitors, which can use downstream access while Royal Mail has to pick up the final mile. There is no way that that is going to be cost-effective if you are providing a universal service. If you change that and fix those problems, that throws up further money.
Our argument is that you are going to have to change those things to attract private investment. You could then change the Treasury rules, which is something that the Government are considering around NHS foundation trusts. Why can that not be considered for Royal Mail? Our view is that Royal Mail could still borrow on the open market, and we understand Donald’s point that you need to get that money more quickly. We simply say that the Government haven’t looked at the alternatives. Modernisation is the real exam test, not privatisation. We are genuinely concerned, and I believe that the work force are concerned about the debate that is taking place now in relation to whether what the Government are doing is truly going to support the agreement that we have reached.

Q 65

Karl Turner: On privatisation, do you expect it to result in job losses and significant changes in the terms and conditions of your members?

Billy Hayes:  There have already been job losses. Adam Crozier, the previous chief executive, estimated that there were 60,000. We know that there will be job losses as a result of modernisation and innovation. The issue for us is that we have achieved an agreement in the public sector, as I have said, to modernise and take the company forward. We have been dealing with job losses in the company when Adam Crozier was the chief executive and since—we are not simply saying that there will not be any change. We recognise that and deal with that.

Q 66

Karl Turner: Did it surprise you that Moya Greene said that she does not anticipate job losses as a result of this privatisation?

Billy Hayes: I would find it surprising that a private company coming in and looking at the bottom line would not want to look at reducing its cost and scope. Why do I say that? My view is based on international experience. For example, TNT, which runs the Dutch postal service and is much vaunted as the company we should look at, has called the universal service “Jurassic Park”. It is looking towards reducing its services now, as we speak. The only thing that prevents some aspects of the service being reduced is, of course, European regulation, which requires a five-day service. TNT, a real-life example, is looking to reduce the services, so I just cannot see it.
We have also got the regulator within 18 months looking at the USO. There is provision re-examining the USO, and I would be amazed, if Royal Mail is privatised and in the private sector, that the private sector would not look to reduce services. All the evidence is there internationally, and I am sure that that will be the case in the UK. We have a very good universal service in the UK.
What is also an innovation in the Bill—it was not in the previous Bill—is the ability to have a number of USO providers, not just one. What tends to happen in a liberalised market is that the USO provider is normally deemed the operator—that is TNT in Holland, Deutsche Post in Germany and so on. What is in the Bill is absolutely unique. I have never seen in any other privatisation or liberalisation the ability to have a number of USO providers, not just Royal Mail. So, in an area such as Birmingham, for example, it could be deemed that the USO provider for a service could be TNT or UK Mail.
Under privatisation, and looking at the remit, the imperative will be the bottom line. There is evidence of that already, even in the discussions that we have had informally: why do we have to provide this service? In respect of Post Office Counters, 30% of the revenue comes from Royal Mail. It is all very well to say, “We will make an agreement.” As I understand it, there is now no commitment to any five-year or 10-year deal. It will be in the prospectus, we are being told. The imperative will be, why should we use that company, if it is too expensive?
Already Royal Mail, as recently as this week, has asked all its suppliers to reduce their costs by 20%. That is now. When Post Office Counters is separated, it will be a supplier. So, first off, there will be a 20% reduction. Look at the hidden subsidies: a lot of post offices, particularly in rural areas, have what are called scaled payment delivery offices—tiny little delivery operations. All that will be under examination. The bottom line will be, “Let us reduce costs. Let us cut what we can.” That is what all the evidence is internationally, and I have no doubt that it will be the same in this country.

Q 67

Gregg McClymont: You may have listened to the evidence that we heard earlier. It seems that the modernisation programme has been a great success. It is coming strongly from the Royal Mail CEO that it has been a great success. Moya Greene’s argument about why we must go ahead with privatisation despite that great success seemed to boil down to one of two arguments. One was that the company needs access to capital. I wonder whether you could comment on that.
The second argument, in response to something that I asked her about, was that the Government should have no role whatsoever in any commercial enterprise. I wondered whether you thought that might play a role in how Royal Mail is viewing this whole enterprise.

Billy Hayes:  The logic is that, even in a privatised situation, the Government have a role, albeit through regulation. If you say that you want a Post Office or a Royal Mail, you have to say what it is that we as a society want from them—not everything is bottom line. Once you say that we want a universal service—Land’s End to John O’Groats, six days a week, 28 million addresses—the Government are intervening. The question then is about the imperative. Once you are in the private sector, even under European regulation—TNT referring to a “Jurassic Park” situation in Holland—the imperative changes, so the driver will be different. Can you remind me of the second question?

Q 68

Gregg McClymont: As the discussion ensued, it was clear that the Royal Mail argument was about private capital. I want to ask for your views on that. Do you think that there are other ways of getting private capital? Do you think there might be a general view that the Government should not have any role in the private sector, other than as a regulator? Do you think that that is wise?

Billy Hayes:  It is already in the Bill that the Government will have a role in Post Office Counters. Clearly, they want to have a role because people value their postal service. The Government should have a role in Royal Mail, albeit the current situation is kind of arm’s length, but we have to make a decision as a society.
In terms of access to funds, the first thing is dealing with the pension deficit—about £288 million to £300 million extra capital. Then changing the regulation regime, which is bleeding Royal Mail dry in terms of access: what other company says that it will underwrite its competitors? Thirdly, the modernisation is fully funded.
In terms of access to future capital, we have the NHS trusts idea in terms of bond markets and we have the experience of the channel tunnel link and access to private capital. But we also have—dare I say it—the Canada Post example. Moya Greene led a very successful company, Canada Post, in the public sector, and she did very well in terms of leading that company. There is no reason why Moya Greene cannot continue that success. She is already making changes. The access to capital can be dealt with in terms of regulation, the pension deficit and, if necessary, access to bonds, because that is what happened in Canada.

Q 69

Gregg McClymont: So why are the Government going ahead with privatisation?

Billy Hayes:  I think it is ideological. It is this roll-back-the-state idea. It is a funny kind of roll-back because, in so far as it is being rolled back in relation to Royal Mail, I find it very curious with the Bill that the Government are saying, “Yes, we need the private sector to sort Royal Mail out, but we’ll keep Post Office Counters in the public sector.” Ed Davey, the Minister, has talked about post office closures. Well Ed, Tooting sub-post office on London road has closed in the past few weeks and we are told that there are not going to be any more closures. If you listen carefully to what has been said about closures, you will hear that they talk about a programme of closure and there will be more closures of post office counters once you separate Royal Mail.
We have not heard anything yet about the Department for Work and Pensions and the 400,000 people who use post office counters. I give credit to Peter Mandelson who, when they were tendering for the DWP work, had the good sense to stop that tendering process. But the current Government are allowing a vital link in Post Office Counters—that is the Government Department. When we talk about joined-up government, it seems to be joined up with spaghetti. DWP is tendering. Is PayPoint going to get the post office counter work? I bet it will, because of the tendering process currently in place.

Q 70

Richard Fuller: I want to address a question to each of the three representatives from CWU, Unite and the National Federation of SubPostmasters, if only so the latter two do not feel that they are being crowded out in this sitting. Before that, I would like to place on record my grateful thanks to the CWU representatives—the regional secretary and the many workers from the sorting office in Bedford—who came to see me. My question is about the proposals to extend employee participation on the Royal Mail side through a 10% employee participation, and on the Post Office side through mutualisation. I would be interested to hear from each of the three representatives what they think about this extension of employee participation and whether, particularly on the Post Office side, if the Bill is passed and Royal Mail is privatised, the employee representatives or unions would be interested in extending employee participation. One of the most important things for employees through this Bill is to have certainty for their long-term employment, and a broader role for employees in the ownership of participation in the management of these businesses might be most welcome to them in providing that certainty.

George Thomson:  The National Federation of SubPostmasters has been working on the mutualisation concept for more than two years. In fact, we are very supportive of the Post Office eventually becoming a mutual company. However, the company has to be worth mutualising. As it is at the moment, Post Office Ltd is, financially, a basket case and many thousands of sub-postmasters are, as we speak, hanging on by their fingertips. So there is a lot of work to be done before the funding package really kicks in in April 2012, because we have 18 months of sub-postmasters being up against very strong headwinds to survive and keep their office alive in the community.
Certainly, as a concept, mutualisation would work. In fact, I would go further: if Royal Mail Group is privatised, I think there is a case for the postmen and the staff to own 20% of Royal Mail Group; for that to be mutualised as a concept so you do not sell your shares when you leave the company but leave them behind; and for the CWU to be on the board of the new Royal Mail Group. So I see it not just for Post Office Ltd. I see it as let’s do it right within Royal Mail Group. If it is going to be privatised to bring in private capital, there is a case for making it 20% of the shares, which are not sold on. You make sure that the company is headquartered in Britain and it is an IPO—initial public offering—so it is the British public who buy the shares, initially at least.

Brian Scott:  From our perspective in terms of the Post Office, we are waiting to see in a bit more detail what mutualisation might mean, because we have not been working on it for two years; George has been leading the way on that one. We want to see what it means and how it can increase involvement, participation and commitment. We want to see what it means in terms of responsibility and payback for it in terms of reward. What does that look like? In terms of getting people involved in the organisation, that is important, but we shall wait a little bit longer and keep our powder a little bit dry on mutualisation of the Post Office until we understand it better.
On employee ownership of Royal Mail, we think why stop at 10%? George says 20%. That is a fair argument. We would go as far as saying what about 49%? Why not give the employees a real share in it, an element of real ownership of it? We could say 49% employees and 49% Government or private perhaps if we go down that road, or it could be 51% Government. If there is a 49:49 split, it could be 2% for Government.
The previous chairman of Royal Mail always extolled the John Lewis model. The John Lewis model is the one that has been talked about in terms of the Post Office. The John Lewis model is a very effective model from the retail perspective, but John Lewis or the person whose name escapes me—he did not have the first name of John, but the second name was Lewis—handed over his company to the employees when it all started, which meant real involvement, real ownership and real participation. The employees had that sense of belonging. But we think the Government are making a mistake and failing with the 10% limit.

Q 71

Richard Fuller: But philosophically, you think that extending employee ownership with these proposals is a good start. If I am correct, it is a minimum of 10% in the legislation. Philosophically, you agree with that step.

Brian Scott:  We think it is worth while, yes, but we think it should be more than 10%. As far as having trade unions on the board goes, that can be a good idea. It was tried in the early ’70s. There are lots of reasons why at that point it was not particularly successful, but it could be successful in future if they are treated as an equal partner.

Q 72

Damian Collins: George Thomson, in the written memorandum from your organisation that was submitted to us, you said that the National Federation of SubPostmasters supports mutualisation in principle. Obviously, you have just said a bit about that. I have two questions. First, do you have a view or would you make a recommendation to Government on what model of mutualisation should be developed, if you could design it or recommend it? Secondly, in the previous witness sitting the chairman of Royal Mail suggested that mutualisation may be attractive to retail businesses and businesses looking to get into operating and setting up new sub-post offices. Do you have a point of view on that?

George Thomson:  We are very attracted to the John Lewis model—agents and staff owning the company, going forward with an asset lock so that assets cannot be sold on and working to make the company very profitable and very worth while. But we have to be careful. The Government have to deliver two or three sets of things as far as I am concerned. They have to deliver a 10-year IBA—inter-business agreement—and I think it is in the Government’s gift to do that. They absolutely have to deliver new Government work, including the green giros, which are out to tender. It is absolutely vital, as a show of faith, that that contract comes to the Post Office. We have had the green giros since 1968, and I think it would be extraordinary to lose that contract at a time when the Government are talking about putting new work through our counters.
But again, I have to congratulate the Government on the £1.34 billion funding package, which was excellent news. That should allow us to have a more sustainable model. Paula Vennells touched on some of the aspects of Post Office Local. I think that will work in many locations.
Can we go beyond the 12,000 or 11,900 post offices that we have at the moment? One or two MPs touched on that. We have to be careful. We did not get everything right, but a lot of Government money has been spent in the last 10 years closing branches. We can argue about whether that was a good or a bad thing, but the real reason for it is that society is changing and people’s shopping habits are changing. There is less shopping on the high street, and customer numbers have drifted down from 28 million 10 years ago to 19.5 million or 20 million. So we have to be careful, if we go beyond 12,000 post offices and maybe have 1,000 or 2,000 more, that we do not cannibalise the ones that are already there and just come back to the problem of closing post offices down. If the work is disappearing and there is not enough new work, there cannot be a logical case to open more than 12,000 post offices. If the Government step up to the plate and deliver the promised work—we have been promised work for a long time, I might add, and we need it to be delivered—there could be a case for having a network larger than 12,000, but I am not convinced.

Q 73

Damian Collins: Following the comments made earlier by Mr Hayes, one expects a little bit of churn within the network. As I have seen in my constituency, someone running an independent business, such as a village shop or a community shop, may retire or may be unable to continue their business, so their counter could be lost. We want the flexibility in the network, and for the proposition to be attractive enough, so that someone else would happily come in and take on that business. So, even if the sub-post office moved location, the community could still have some sort of service. The proposals for mutualisation potentially make it more attractive for new agents to come in and make up such gaps in the network.

George Thomson:  Mutualisation will have a role in determining the attractiveness of a franchise, but the reason people are struggling to sell their post offices in many cases is that a post office franchise as we speak is not particularly profitable and is not particularly attractive, so in certain parts of the country it is taking six, seven or eight months, or even two years, to sell a post office.
Sub-postmasters are really struggling, because they do 80% of the work over the counters, and yet last year our income was only £430 million. Do the sums. We, including the SNP, were responsible for generating £800 million of the income, yet we only received £430 million of the pay. Post Office Ltd has to get a grip on its fixed costs as well, because, quite frankly, sub-postmasters cannot continue with not enough money to keep their post offices open. Something’s got to give, because we are facing a crisis. Mutualisation will help, but the Government have to deliver on new revenue streams and new work, because if they don’t, all we are doing is kicking the problem into the long grass for three or four years. I hope that Ed—the Minister—delivers, but I have had a lot of broken promises over the last six or seven years.

Q 74

Michael Weir: The Post Office and the Government have said that there will be no more closures, and I understand that there will be no more closure programmes, but you have rightly made the point that many or most small sub-post offices are part of a larger business, many of which are struggling. Many of them are also the only business left in a village. How realistic is it to promise no more closures? In the event of the closure of such a business, how realistic is it for someone else to come in and reopen that post office?

George Thomson:  Where you have a postmaster or postmistress really struggling on their own with just a load of cards and stationery, it would make more sense to merge them with another outlet, such as a convenience store or a good newsagent, in that village or town, if there is one. That would make sense, because you would then have a sustainable business model that utilises both the shop side and the post office side. That is the way to ensure long-term sustainability. Where you have only one post office in a village and nothing else—a little bit of groceries in the post office—there will probably still need to be a continuing subsidy to keep that post office open. Certainly where you have a choice, with perhaps two shops in a village—one being a post office that is doing very badly and one being a convenience store that is doing okay—it would make sense for politicians, such as local councillors or the local MP, to go for one sustainable, robust shop and post office in that town or village. That would make more sense than what we have now.

Q 75

Michael Weir: But is there not pressure on those small shops in towns and villages already? The post office business forms part of the overall income, but there are pressures on all parts of such businesses. How many of your members are operating a shop-post office combination, and how many are making a decent living out of that?

George Thomson:  It is becoming harder and harder for small business people. We’ve got to have a small business agenda in the UK because, like it or not—I have said this before—the big supermarkets have been allowed, unchecked, to open up almost wherever they want. Parliament has allowed Tesco Express and Sainsbury’s Local to go into convenience retailing as well. If we are really serious about the big agenda and localism, we have to look at how to better look after not only post offices and local communities, but local shops, because it is becoming harder and harder for local shopkeepers to make a living.

Q 76

Michael Weir: With respect, George, you are not really answering the question. The Tesco Expresses are in larger towns, but many small towns and rural areas have a shop-post office combination. The owner of that shop-post office combination is facing pressure from all sides on both sides of the business. It is suggested that if such a business was to go under, there are to be no more closures, so presumably another post office operation will come in. I am asking you, in your opinion, how feasible is that? Is that just pie in the sky?

Dave Ward:  I did not get an opportunity to answer the question that Mr Fuller posed about employee ownership, and given that we represent probably 95% of the members who are affected by this, I think we should have a chance to answer that.

Jimmy Hood: Well, Mr Ward, you should have jumped in at the time. I didn’t see you. I see you now, Mr Ward.

Dave Ward:  I’m jumping in now. I’m putting that right. People don’t normally have a problem seeing me, but there you go.
This is a really important question. Again, I am going to put forward evidence here about the Government’s position. They haven’t asked the right question. What is this about? What are we trying to actually achieve by the 10% employee share offer? If we accept that what we are trying to achieve is to motivate and engage employees to make sure that they feel more involved in the decisions of the company, we want that. We agree with that. That is why we have reached the agreement that we just have. But I have to say that I fundamentally disagree with Donald’s statement that employees are going to be cheering from the rafters when they get their first dividend. There are so many more important issues that you have to deal with if you want to achieve employee engagement and motivation. The way to do that is to apply the terms of the agreement that we have reached.
It is about changing. The first thing you have to do is change the command and control culture of management in this industry. What we have in this industry is too many people supervising people and not enough managing people’s problems in the right way. I also believe that we have too much budget control that bears no resemblance to what actually happens at a local level. So it comes back to the point of people having a fair and manageable work load. Our members will cheer from the rafters when they get treated properly and when they feel that they are properly involved—not by shares, but by what happens daily in their work place.
I would also suggest to you that we have pushed for a completely different approach from the HR procedures in the company. That is key to changing the culture in a company. You have to have HR procedures—rather than what I believe happens at the moment, which is that they are based on almost punishing people—that are actually about correcting things and reconciling people’s problems, rather than just saying, “We’re going to punish you for this”.
Communications—you cannot change the culture in a company unless you change your communications strategy. What have we had in recent years? We have had, to be fair, Royal Mail and CWU competing over communications with the employees. I honestly believe that the company has put out a lot of mixed messages in that time. You cannot engage people if you treat the people like robots, if you stand in front of them reading out messages. When the noise comes back, “Well, actually we want to talk about this issue”, you go, “No, we’re not talking about that today, because we’re delivering our message.” They are fundamental things that change a company.
Now, where are the employees on this? Well, why not ask them? We are not afraid for the Government to ask. We’ll be asking them about where they are. I’ll tell you what the employees will tell you honestly. They know that there are no free gifts. They know that, in giving them 10% of shares, there is every possibility that that comes out of the same pot of money that protects their pensions and increases their basic pay. Ed, I wish you’d asked us before you made up this policy. I don’t think you understand the agreement that we’ve reached. I’m going to keep coming back to that point, because that is the biggest chance of changing the culture in the company. If you want to incentivise people, you take the incentive down to local level; you don’t have it up here. If you want evidence of that, have a look at colleague share. That was something like £1.2 billion, which the Government earmarked for Allan Leighton to offer to employees. It didn’t change a single thing, that is the evidence and that is the truth. If it had done that, we wouldn’t have had the disputes we’ve had; we wouldn’t have had the agreement that we’ve just reached. I am sorry, I believe that if you share money with an army of private investors—because that is what the dividend is about—then you are taking money away from the employees who really care about the company.
Why not put employees on the board? It doesn’t have to be the trade union. Why not change the governance structure? Why not encourage customers to come in? Our point is this: there are far better ways of achieving that aim, than 10% employees’ shares. If you introduce the Bill, of course at that point we are going to say that we would rather have more control for employees—that’s just common sense. We are saying that we are coming up with the wrong solution without exploring all the questions. We will ask the employees whether they believe that is the right solution. I do not believe that they will support that.

Q 77

Richard Fuller: One of the constituents that I think you’re missing here is the taxpayer. The taxpayer is being asked in this Bill to take on the actuarial loss of the employee pension fund, which may be £8 billion. When I spoke to Mr Hayes yesterday, it seemed it might be slightly less than that. We have to bear in mind taxpayers’ interests when we are looking at further capital investment into the Post Office. We have a very willing audience here in terms of looking at creative ways in which our postal service can represent employee rights. I would ask this direct question of the CWU: would the CWU consider participating in an offer to acquire more shares together with a private bidder, if this legislation goes through?

Billy Hayes:  You are asking a question based on something that we do not accept is needed. We will answer it in this way. We expect the Government to consult the people who have reached agreement with the employees. We are the employees’ representatives. We say it is wrong the way the Government are going about this. I feel that people do not understand the agreement we’ve reached; how in depth it tackles many of the problems, the things that people keep saying are wrong with Royal Mail. I don’t think you are giving that agreement due consideration. I think the policy is being put forward in the wrong way. So, the answer is that if we were consulted properly, if the Bill went through, of course we would want employees to have more say in the running of the company. We don’t believe that the proposal that is in front of us is the right or best way to do it. We think there are better and more dynamic ways of achieving that aim.

Q 78

Gordon Banks: We have heard from Mr Fuller and Mr Ward. You mentioned earlier when we talked about the pension deficit that you were having some concerns over the pension situation. Maybe you could amplify that; what concerns you do have over the proposed privatisation and relationship to pensions for your members. Do you think the pension fund has been guilty of bad decisions in the past, as has been suggested by the Secretary of State for Business? Mr Fuller mentioned the pension deficit. It has been suggested that it is as high as £10 billion, or mid-ground £8 billion—for various reasons it looks as if it is being recalculated down. I think that is something we should not lose sight of in these discussions: the state is contemplating taking on a reducing level of commitment. What is your position on that? Do you think that is something we should not lose sight of? I am concerned to hear your concerns about pensions in relation to privatisation, and also why we have got to the situation that we have over the 13-year holiday.

Billy Hayes:  Before Dave comes in, Gerry Degaute, the chief executive, has written to the Secretary of State, Vince Cable, about his comments in the House of Commons. He believes them to be incorrect and misleading Parliament. That is the first thing. Again, there is £26 billion-worth of assets being transferred to the Government. It is not like this is all confetti. Leave aside the fact that the money was not invested in the company for 13 years. Leave aside the fact that £2 billion was given to the Government when we had an old system called the external financing limit, where the payback was set earlier on.

Dave Ward:  There are external factors that have affected the pension deficit. It is not simply down to bad investment decisions. I would understand why the trustees felt the need to write to Vince Cable in order to put him right. I do not think that he based his comments on any factual evidence.
On pensions, I would like the Committee to consider the fact that, as Billy has just indicated, there has been a lot of talk about the Government taking on the liabilities of the scheme. From our perspective, we would make very strong arguments that said that this is not a bail-out. The employees do not accept that this is a bail-out. First and foremost, the Government own the company. You have to accept that successive Governments have created part of the problem. They sanctioned the employer having a pension holiday for 13 years when it had the money to invest in the pension scheme. They allowed that to happen.
If you go forward on that, you cannot ignore the fact that the Government are taking the liabilities of the scheme. They are talking about taking something like £25 billion-worth of assets. We welcome the fact that Royal Mail will not have the financial burden of the pension deficit going forward. We have argued for that, and we support that. We do not believe that you have to privatise the company to achieve that, and we would like to hear any arguments in law that say that that needs to happen. We simply do not accept that.
What about the members’ pension entitlements? We do not really know, we are not convinced at this stage from the information that we have seen, we are checking this out with experts in pensions and with our lawyers, and we are also in the early stages of consultation with the Shareholder Executive. We are not convinced that this is as good a deal for people, in terms of members’ pension entitlements, as the way that it is being presented. What you have to think about is what assets of the scheme are going to be left. Are they going to be sufficient to fund the scheme going forward? I do not think that we have had the answer to that question yet.
If you split POL, you split the pension scheme. You are talking about three potential divisions in the assets. First, the Government are going to take the assets. Secondly, they have to decide how much of the assets will be left to fund the Royal Mail scheme going forward. Thirdly, they have to decide how they split that between the Royal Mail scheme and the POL scheme. With due respect, this is our members’ money. This is the money that they have paid in year after year—active members, deferred members, retired members. We do not think that enough consideration has been given to people’s pension entitlements, so we are going to be looking at that a lot more closely in the coming weeks.

Q 79

Andrew Stephenson: I shall continue on the pensions theme. We have to get the Bill right for the employees of the company, but many taxpayers will ask why it is necessary for them, at the current time, to take on a further £8 billion pension liability or whatever the deficit is—there is a range of figures from six to 10. From what you were just saying, you were indicating that you thought that the Government should take on that liability without privatisation and without the other aspects of the Bill. Is that what you would propose to deal with the pension deficit?

Dave Ward:  There are three problems with the company. One was modernisation, which we have addressed, and that can only be delivered through the work force and the company working together, and, difficult though it is to address that level of change, there is a good agreement that we are all up for that.
The second issue is that we have to fix regulation. You have to look at how regulation, introduced by a Labour Government, has made it almost impossible for Royal Mail to operate effectively and has put the USO at risk in the process.
The third issue is the pension deficit, and the point is that the Government have a responsibility. They own the company. They were there over the years while the deficit reached this level. The taxpayer has not had a bad deal out of Royal Mail. In many ways, you could argue that the taxpayer—or each successive Chancellor—has used Royal Mail as a cash cow. When Royal Mail made profits, it was not allowed to reinvest them because of the external finance link. Looking at it in the round, we believe that the Government should take on the pension deficit. We do not believe that that is dependent on privatisation.

Q 80

Andrew Stephenson: I hear what you are saying, but I think that many people in the room would argue that given the Government’s taking on and fully funding the pensions liability, and the basing of the employee shares at a minimum of 10%—I think it is right to say that it is at least 10% going for share ownership for the employees—that is a very good deal for the employees.
As a general question to all of you, are there any provisions in the Bill that you support? Are there any key elements that you are happy to work with the Government to see introduced? Earlier on, you were saying that the Government were coming from completely the wrong angle on the Bill and that you reject its premise.

Dave Ward:  The question, as the Government say to us, is how we can maintain the universal service and the nationwide network of post offices. That is the way the Government pose the question. Our argument is that privatisation is not the answer. You could easily point the finger at us and say, “Well, you would say that; you are a trade union and you are in a public sector organisation.” All we ask is that the Committee looks at the facts and examines whether other alternatives exist to address the challenges that the company faces.
We are not in denial about the challenges that Royal Mail faces. We passionately believe that every one of those challenges can be resolved by logic and by fact without endangering the future of the universal service. We also believe that it does not matter what you say; if you privatise a company, at some point the service standards of the universal service will be at risk. They will be at risk in rural areas, and in other areas.
The Bill has many loopholes that could be exploited, and we would like to see those tightened up. We would support something that said that Royal Mail was the sole provider of the universal service; it should be. If you want a universal service, Royal Mail is the company to provide that, but you have to allow it to compete on a level playing field. Privatisation is not the test here; it is modernisation aligned to resolving some challenges that can be resolved in the public sector.

Billy Hayes:  On pensions, if you argue that the taxpayer should not pick up the tab in terms of its being created—

Andrew Stephenson: That is not my argument; that is a common argument.

Billy Hayes:  We support what is said about the liabilities, notwithstanding the fact that the Government will get £26 billion of assets. If the converse argument is that we will privatise the company and we will expect a private sector company to take on the £8 billion deficit, it will not happen. That is a fact. If the argument is that the taxpayer would blanch at the idea of taking on that level of deficit, as Dave has said, we say, “Put us to the test.” We were put to the test on modernisation. Hooper suggested that the UK postal service could not be modernised in the public sector, but it has been with an overwhelming 3:1 endorsement by the work force. It has been deployed, and you have heard evidence of that today. Hooper said that we need foreign expertise, and we can think of no better person than Moya Greene. Canada qualifies as a foreign country, even though it is in the Commonwealth.
Richard Hooper talked about a strategic partner but in his new report he has now slipped in, with a slash and a dash, an initial public offering. An IPO has never been mentioned before, but he just slips it in, and you get the impression of, “You hum it, and I’ll sing it.” That is what that report feels like.

Brian Scott:  Our concern is that the Government are currently blinkered in their approach to what the answers might be. Everybody wants a sustainable Post Office and Royal Mail, a universal service and a uniform tariff. If privatisation takes place, over time the universal service will deteriorate and be reduced—not next week, next month or next year, but it will happen in time. The uniform tariff will change and there will be different prices for different parts of the country; those are all negatives and the results of privatisation, and we would say that there are alternatives.
If you look at the Post Office, as part of the Post Bank Coalition, we asked BIS or the Government to set up a working party to look at creating a bank at the Post Office, and they downright refused. The announcement this morning was also a refusal. We are asking them to look at it, cost it and examine what would happen, because it could sustain the post office network in future, if dealt with properly. The best example that we can find is Kiwibank, which is run through a post office network. I cannot afford to go, but I am told that you go to a post office counter in New Zealand, and you buy a stamp, do a recorded delivery or a banking transaction. There is not a separate network; it is there and they fund each other. That is the issue with the Post Office.
We believe that privatisation is not the answer; modernisation is taking place, but there is still a long way to go. The World Class Mail programme was mentioned in a previous panel contribution, and it is a very good thing in Royal Mail. It makes people feel committed and feel part of the solution, not part of the problem. It makes them involved in what they are doing in the workplace, but I have two criticisms of World Class Mail. One is that it involves relatively small numbers—it may be in 10 places, but it is a start—but it also takes the organisation back to where it should have started from in the ways of working, the way that the kit was prepared before it started and the way it was maintained. It is not something groundbreaking or new in that regard. It takes it back to what it should have been all the time. There is a long way to go on that. We think that the approach in the Bill—privatisation—is blinkered; there are other options. The same result can be achieved through other means.

George Thomson:  To answer the question directly and quickly, first and foremost, we support the Government taking over the pension deficit; it is common sense and is long overdue—good news. On regulation, I think Richard Hooper does not go far enough, and if the regulating regime is not reduced dramatically—by even more than what Postcomm are saying at the moment—this will become a theoretical argument because you will not be able to sell Royal Mail Group anyway.
Turning to privatisation, our research department has done a piece of work, and I believe that there are certain strategic companies that should be in UK ownership. That is not a public/private debate. Throughout the G8, companies overwhelmingly own mail, telecoms, electricity and gas provision, and I make the point that the UK should not be out of step with that.
On separating Post Office Ltd from Royal Mail, it is unprecedented and we have to get it right, which is why we need a 10-year inter-business agreement. A five-year IBA was signed a year and a half ago with Alan Cook. We were happy with five years because it was going to be a partial privatisation; the Government would still own Royal Mail and there would be a company called Royal Mail Holdings, so we had security. We need security for sub-postmasters; they have £2 billion of their own money invested in this business. If you were a company investing £2 billion in a PFI to build a school or hospital, you would get a 21-year contract. I am not asking for a 21-year contract, but, by God, I am asking for a 10-year IBA contract.

Jimmy Hood: We have less than two minutes left—a quick question from Edward Davey.

Q 81

Edward Davey: First, to Dave and Billy, when your team looks at the pension proposals, if you have particular questions please write to me and copy it to members of the Committee. That will help us in our debates and discussions.
You mentioned the pension trustee. For the record, I should say that the Secretary of State wrote back to the pension trustees and said that he hoped they accepted that he had only said “bad investment decisions” inadvertently; he made it clear in his letter that it was far more to do with the external investment environment. I hope that that helps. On the pension trustees, I do not know if you had a chance to speak to them about the solution that the Government are proposing, because they have legal duties to your members—the beneficiaries of the Royal Mail pension plan. What have the trustees said to you about the proposal that the Government are putting forward?

Billy Hayes:  On the trustees, there was an incident with Jane Newall when Peter Mandelson was talking about privatisation— Are you talking about privatisation per se?

Q 82

Edward Davey: No, I am talking about the pension solution in the Bill. Clearly, Jane Newall and the other pension trustees have discussed it with you, because your members are the beneficiaries—

Jimmy Hood: Order. I am afraid that you will not have time to answer the questions.

Billy Hayes:  I made the point early on that you have not given us enough time. I would love to answer Ed’s question but I am unable to.

Jimmy Hood: I am sure that you will find ways of getting the answer to him.
I thank our witnesses.

The Chairman adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Four o’clock.